02766cam a22003137 4500001000700000003000500007005001700012008004100029100002500070245013700095260006600232490004200298500001400340520120600354530006101560538007201621538003601693690009601729690007201825690011001897690008502007690006702092690007702159700002202236710004202258830007702300856003802377856003702415w18040NBER20180222002953.0180222s2012 mau||||fs|||| 000 0 eng d1 aBanzhaf, H. Spencer.10aOn Fiscal Illusion and Ricardian Equivalence in Local Public Financeh[electronic resource] /cH. Spencer Banzhaf, Wallace E. Oates. aCambridge, Mass.bNational Bureau of Economic Researchc2012.1 aNBER working paper seriesvno. w18040 aMay 2012.3 aWe re-evaluate two forms of fiscal illusion in local public finance: debt illusion and renter illusion. The Ricardian Equivalence Theorem for local governments suggests the form of finance of a public program (tax or debt finance) has no effects on substantive outcomes. For the local case, this results from the capitalization of local fiscal differentials into property values. We show that this version of the model is quite restrictive. In particular, in the U.S, context, where state and local interest is exempt from federal taxation, rational behavior may be inconsistent with Ricardian equivalence if local governments can borrow on more favorable terms than individuals. We also suggest a new test for renter illusion (or the renter effect). In particular, whether or not renters are more likely to support public investments in general, the renter effect suggests that renters are more likely to support them when financed with property taxes than with sales taxes. Using data from hundreds of open space referenda in the U.S. using a variety of finance mechanisms, we find evidence that households do prefer debt financing to tax financing, but find no evidence of the renter effect. aHardcopy version available to institutional subscribers. aSystem requirements: Adobe [Acrobat] Reader required for PDF files. aMode of access: World Wide Web. 7aH3 - Fiscal Policies and Behavior of Economic Agents2Journal of Economic Literature class. 7aH4 - Publicly Provided Goods2Journal of Economic Literature class. 7aH7 - State and Local Government • Intergovernmental Relations2Journal of Economic Literature class. 7aQ2 - Renewable Resources and Conservation2Journal of Economic Literature class. 7aR2 - Household Analysis2Journal of Economic Literature class. 7aR5 - Regional Government Analysis2Journal of Economic Literature class.1 aOates, Wallace E.2 aNational Bureau of Economic Research. 0aWorking Paper Series (National Bureau of Economic Research)vno. w18040.4 uhttp://www.nber.org/papers/w1804041uhttp://dx.doi.org/10.3386/w18040